The dangers of high spending
Peter Hoskin 8:51am
The Independent's Hamish McRae - who's been on the money more often than most commentators during this downturn - today outlines the reasons to be wary of a Government spending boom in the PBR. They're worth quoting in full:
As McRae goes on to observe, recessions - despite their undoubted ills - do give policymakers an opportunity to move to a more efficient economy. For all Alistair Darling's talk of efficiency savings, the Government's high-spending-high-borrowing approach suggests that's an opportunity they'll fail to take."The first is international. Trust is vital and there is a danger of a systemic loss of confidence in British financial management. Already sterling has fallen by as much as it did in 1992 when it was ejected from the ERM. We are going into this downturn with an exceptionally high budget deficit of around 4 per cent of GDP and that could rise to 6 per cent or more in the next financial year. It is plausible that the deficit could be even greater proportionately than the deficit run up by the Tories in the early 1990s.The money has to be borrowed from the international financial community – there are not enough savings in Britain to do it. At some price a sovereign state (with the possible exception of Iceland) can always borrow, but the rates will reflect the risk, and the danger is long-term sterling rates rise sharply.
Second, there is the practical need to keep something in reserve. If you fire all your shots now, you are out of ammunition if they don't hit the target. Imagine a situation in the autumn of next year. We will be in the pits of the downturn. Interest rates will be down to 2 per cent or below. There will have been a temporary tax hand-back but the end of that will be in sight. House prices will still be falling and the economy will still be shrinking. And there will be nothing else that the Government can do.
We may not get there and let's all hope we don't but we cannot be certain that this recession will be short, or that there won't be a second leg to it after the initial downturn.
That is what happened to Japan in the early 1990s. It cut rates to near zero and had a huge public spending programme. Initially it did avoid a recession but at the cost of a deep one in the late 1990s and another in the early 2000s. Now it has debts of 180 per cent of GDP (against our 40-50 per cent) and is back in recession again.
Third, we don't want to make the mistake of America in the early 2000s of failing to make the essential adjustments that a recession forces on us. We have to save more. As individuals we have to do it, and people actually are making quite a bit of progress to that end. We are no longer, for example, taking out the equity of our homes and using it to support consumption. That change has been forced on us by the mortgage famine but makes sense anyway.
Companies are having to cut back, savagely in financial services and other vulnerable industries, including newspapers. And yesterday's statement by the Leader of the Opposition acknowledges that government will have to drive up its efficiency too."
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luke
November 19th, 2008 9:23am Report this commentAll good points. But you are in danger on this website of quoting selectively and only from those who agree with your views.
The weight of international economic opinion is in favour of countries using fiscal stimulii and given the UK's debt as a % of GDP is low compared to most other countries (even if not historically low for the UK) I think the weight of opinion would be in favour of a UK stimulus package.
Forlornehope
November 19th, 2008 9:31am Report this commentPut simply, as a society we need to buy less imported tat and save more. That will hit retailers and importers hard but the quicker we adjust the sooner we can recover. Stoking demand for cheap clothes, imported cars and electronic toys will only put off the inevitable adjustment.
C Powell
November 19th, 2008 9:32am Report this comment"We have to save more. As individuals we have to do it, and people actually are making quite a bit of progress to that end."
Quite so. But so far no-one from the Government or the Tories has said anything at all about the position of savers (who outnumber mortgage holders by 6 to 1). The cut in interest rates is seen as a wholly good thing without any appreciation of the impact on savers or on the need to increase our savings rate. If it is necessary to lower interest rates now why not encourage savers by removing (or cutting) the taxes levied on savings income? If people had saved more, not only might we not be in such a severe mess but also people would have a cushion against hard times.
A fiscal stimulus may be necessary in the short-term but what about in the medium/long-term? What policies should there be to increase our pitiful savings rate? Perhaps this is something the Tories might turn their minds to.
Current policies seem designed to make us spend, spend, spend but isn't spending what we didn't have precisely the cause of the problem?
Rhoda Klapp
November 19th, 2008 9:37am Report this commentLuke, if you truly don't want to look like a Labour stooge, you'll stop posting in such a way as to set off all the alarms.
David
November 19th, 2008 9:45am Report this commentYesterday, Cameron announced that he supported tax cuts, to be paid for from lower spending levels – the same pitch as his election-losing predecessors. The Independent
"Conservative tax cutters should not celebrate too much. Yesterday’s announcement by David Cameron that he will not match Labour’s spending plans from 2010-11 onwards matters more symbolically than practically. Whichever party wins the next election, taxes will have to go up." The Times
"The Conservative leader's off-the-hook speech prompted immediate applause from rightwing MPs, activists and zealous bloggers who have been saying, as usual, that tax cuts are for men, NHS spending pledges for wimps. Business leaders, as well as the unions, were less impressed by the timing." - The Guardian
Hurrah! Just the reaction you thought would happen, eh, Fraser? What? Oh.
wonderfulforhisage
November 19th, 2008 9:52am Report this commentPeter you write "Hamish McRae - who's been on the money more often than most commentators during this downturn"
John Redwood has also been spot on most of the time. Pity he doesn't resonate with the new 'Brand' of Conservatism.
I suppose we'll have to make do with the 'Heir to Blair' and his sidekick.
oldtimer
November 19th, 2008 10:01am Report this commentIt is worth reminding ourselves, and Luke above in particular, of the words in the G-20 statement:
".Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability."
The issue is sustainability. Ministers have as good as admitted that the predicted tax "cuts" will be funded by yet more government borrowing and are temporary only. In short they are not sustainable.
It would not be the first time that a Brown tax cut was announced before an election, only to be followed by Brown tax increases after the election. This time they have been forced out into the open beforehand.
The other inescapable fact is the sharp decline in the £ fx rate after Mr Darling announced in July the abandonment of his fiscal rules. Foreign investors took fright; some £50 billion was shifted from the UK (per Mr Hutton).
There is at least as much chance that Labour`s extra debt will only serve to prolong the recession - not solve the crisis - because it will be followed by even higher tax increases.
Hereford
November 19th, 2008 10:07am Report this commentLuke: debt is would not be measured as being so low if the huge off-balance-sheet debt that Brown hides up his sleeve were accounted for in the numbers.
sam godfrey
November 19th, 2008 10:34am Report this commentHappy birthday santa(Mr.Smith)
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